Explainer: What to know about pan-Africa payment system

The Pan-African Payment and Settlement System (PAPSS) is a revolutionary financial market infrastructure to enable instant, cross-border payments in local currencies between African markets.

PAPSS is billed for official launch on Thursday in Ghana after it was rolled out in September 2021 as a pilot project by Afreximbank and the African Continental Free Trade Area (AfCFTA) Secretariat.

It will enable the efficient flow of money securely across African borders, minimising risk and contributing to financial integration across the region.

Although Nigeria is the largest market in Africa, this does not reflect in the level of trade between the country and the rest of Africa,” notes Taiwo Oyedele, head of tax and corporate advisory services at PwC.

With it coming into effect, Oyedele says the lack of a pan-African payment system continues to be a major impediment to trade within Africa. Hence, addressing the issue through a pan-Africa payment system will facilitate Intra Africa trade and thereby benefit businesses on the continent, including Nigerian banks.

The PAPSS will also reduce the current high transaction costs, and also reduce liquidity requirements of commercial banks for settlement. Banks may however see their roles diminish as lengthy correspondent banking is phased out, Oyedele states.

How PAPSS works

In order to enable instant payments across African borders in local currency, PAPSS supports three core processes: instant payment, pre-funding, and net settlement.

How instant payments work

An originator issues a payment instruction in his local currency to its bank or payment service provider. The payment instruction is sent to PAPSS. PAPSS carries out all necessary validation checks on the payment instruction.

The payment instruction is forwarded to the beneficiary’s bank or payment service provider. The beneficiary’s bank clears the funds to the beneficiary in his local currency.

With instant payment, participants no longer need to convert local currencies into hard currencies, which then entails the funds leaving Africa to be converted before being sent back again to the beneficiary bank – adding days to the transaction time. In addition, compliance, legal, and sanctions checks are performed instantly within the system, resulting in a near-instant payments process within 120 seconds.

How pre-funding works

Direct participants integrate directly with PAPSS and the real-time gross settlement (RTGS) systems of central banks in the pre-funding process. Participants without a RTGS account – indirect participants – are able to fund or defund their clearing accounts on PAPSS with the aid of a direct participant providing the required liquidity.

Notifications are carried via the ISO 20022 messaging standard, notifying PAPSS, the Participants, and RTGS of the status of every stage of the transaction.

Due to the speed of the real-time payment process, PAPSS needs to guarantee that funds are available to complete the originator’s transaction before effecting the movement of debits and credits between participants’ accounts. Participants must, therefore, agree to a pre-funding arrangement.

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How settlement works

PAPSS needs to ensure prompt settlement within 24 hours. Net settlement across all participating central banks occurs at the same time – 11.00 UTC – each day.

At the end of the day (currently 11am UTC), PAPSS determines the net position in local currency for all participating central banks. PAPSS sends credit or debit settlement instructions to central bank RTGS (depending on net position). Central Bank RTGS debit or credits between PAPSS Pre-funded Account and Central Bank suspense account and confirms settlement to PAPSS.

PAPSS mirrors central bank instruction to conclude local currency settlement. PAPSS issues equivalent hard currency settlement instructions (based on the net position) to Afreximbank. Afreximbank credits/debits the central banks’ hard currency settlement account held in Afreximbank and confirms to PAPSS.

PAPSS core services

PAPSS’ core service is provided by the PAPSS instant payment system (PIP), and supports wholesale and retail real-time payments and the connectivity of banks and payment service providers.

Key features of PAPSS instant payment include instant and irrevocable credits to customer accounts, immediate confirmation to both originator and beneficiary, service availability 24/7, (365 days) a year, ISO 20022 global message standard allowing interoperability, large data sets, and rich data for payment and remittance information, secure infrastructure, incorporating cyber-security and payment fraud systems underpinned by behavioural analytics and machine learning capabilities.

The development of a pan-African payment infrastructure has been made possible by some of the continent’s leading institutions. The platform has been developed by Afreximbank, who also acts as the main Settlement Agent in partnership with participating African Central banks. The implementation of the infrastructure is taking place in collaboration with the AfCFTA Secretariat with the endorsement of the African Union (AU).

PAPSS Governing Council

Based on powers derived from its Treaty, Afreximbank has established the PAPSS Governing Council (PGC) to provide oversight and regulation of PAPSS. Godwin Emefiele, governor, CBN, is the chairperson.